Mumbai: Even as nervousness continued to ripple through global financial markets, the Bombay Stock Exchange’s (BSE’s) benchmark Sensex plunged 642.7 points, its second biggest one-day fall ever, closing at 14,358.21, down 4.3%.
The National Stock Exchange’s broader index, the Nifty, fell 191.6 points to close at 4,178.6, a fall of 4.4%. Shares of mid-cap and small-cap companies, too, saw large drops, though these were not as steep as those in the bellwether stocks.
Markets across Asia fell on global cues, as worries spread about the growing turbulence in?credit and currency markets.
South Korea’s Kospi fell by 6.93%, to end with the largest single-day fall in its history. Hong Kong’s Hang Seng index was the biggest loser of the day in absolute terms; it fell 703.33 points or 3.3%. Other regional markets, too, lost between 0.43% and 6.01% of their value.
European markets were down on Thursday, and the US Dow Jones index, too, was down 250 points at 10pm IST.
“The psychology is shifting notably today,” said David Bowers, a global strategist at Absolute Strategy Research in London. “When a market drops by 10%, people start to feel it in their portfolios. People are used to stock markets behaving in a non-volatile and even bullish manner.”
The Sensex is now 9.52% off its recent highs and confusion is rife in the stock market.
Several large investors and institutional money managers told Mint that they would rather not comment on the equity markets since the situation was very confusing even to them. Market participants note that small investors, too, have been rattled. A mutual fund manager, on condition of anonymity, said he now keeps between 7% and 10% of the assets under management in cash, so as to be prepared to meet redemption pressures in case investors head for the exits in the coming days. His usual cash balance, he said, was 2-3% of assets.
Indian mutual funds have not seen any major outflows as yet with investors actually having poured in a net Rs13,275 crore into domestic mutual funds in June and July.
While domestic banks, insurance companies and mutual funds bought Rs1,398 crore of equities on Thursday, foreign institutional investors (FIIs) reported sales of Rs3,108 crore of equities, according to provisional figures put out by the two exchanges.
Bloomberg data show that this is the largest ever withdrawal of foreign portfolio money from the Indian market in a single day over the past 12 months. The previous worst was on 8 January, when FIIs had sold Rs3,075 crore worth of equities.
Banks, metals and real estate led the market fall. The BSE bank index was down 5.42%, the metal index by 6.51% and the realty index by 5.56%. These falls mirror similar falls across the globe: banks and real estate are down because of their links to the subprime mortgage problem, while metals are down because of a drop in commodity prices.
However, the information technology index held up better than its peers, as a 1.5% fall against the dollar took the rupee to its lowest point against the US dollar in three months.
The rupee’s fall was part of an Asian script, as the dollar gained against most regional currencies. More ominously for the stock markets, the yen continued its rise against the dollar and the world’s other major currencies, leading to fears that the yen carry trade is unwinding.
This trade, where investors borrow cheaply in yen and invest in high-yield currencies and assets, has been one of the founts of global liquidity in recent years. Its contraction could put further pressure on emerging market equities. (Also see Mark To Market column on Page 14).
Kingston Lin, senior investment manager at Prudential Brokerage Ltd in Hong Kong, said he is worried that money is constantly flowing out of the Asian equity markets and there seems to be no immediate end to this problem. “The strong surge in the value of yen (will force) many investors to pull money out of the equity markets. We don’t think that the Asian indices have bottomed out. The Hang Seng could lose another 1,000 points in this run. It’s hard to judge the time of recovery,” Lin said in a telephone interview.
Even as several Asian central banks stepped in to calm their currency markets, several indicators of investor nervousness continued to climb. The Chicago Board of Options Exchange VIX, a measure of the implied volatility in equity options that is often described as the financial world’s fear gauge, climbed above 30 on 15 August. This is its highest level since March 2003 and an indication that traders and investors are worried that the turmoil in the markets is far from over.
There is similar anxiety in India as well. “Nobody seems to be capable of measuring the magnitude of the problem at present. The involvement of central banks in curbing the problem itself indicates that it’s big. Since this is not a correction based on valuations, one cannot really predict the bottom,” says V.R. Srinivasan, chief executive of Brics Securities Ltd, a Mumbai-based brokerage.
But M. Damodaran, chairman of the Securities and Exchange Board of India, asked investors not to be unduly worried about the corrections in the Indian market. “We don’t have to be unduly worried about (the market correction). It will be a manageable correction and will have no destabilizing influence in our market. It will have no systemic issues. Our market continues to be a safe market, notwithstanding what happened in subprime lending,” he said in Hyderabad.
Ketan Karani, vice-president of research at Kotak Securities Ltd, expects the Indian market to fall further based on global cues. “The global market issue could take more time to settle down. Only time can say where the market hits the bottom. The markets could correct more. We will continue to move in line with the international market. There is very little retail buying in the market at present though some domestic institutions have been buying at these levels.”
Mint’s Rachna Monga and Ashwin Ramarathinam in Mumbai and C.R. Sukumar in Hyderabad,?and Carter Dougherty of The New York Times also contributed to this story.